English Court of Appeal affirms application of the “Gibbs Rule” in a cross-border restructuring

Under the English common law rule known as the “Gibbs rule,” a contractual obligation can be changed or discharged only in accordance with the law governing that obligation. Consequently, a debt governed by English law may not be discharged in a foreign insolvency or under a foreign restructuring plan unless the creditor submits to the foreign insolvency proceeding or consents to the plan. Earlier this week, the Court of Appeal of England and Wales affirmed the application of the Gibbs rule in a case under the Cross-Border Insolvency Regulations 2006 (“CBIR”), Great Britain’s version of the UNCITRAL Model Law on Cross-Border Insolvency, or Chapter 15 as it is referred to in the U.S.

Background

Facing financial distress, OJSC International Bank of Azerbaijan (“IBA”), the largest commercial bank in Azerbaijan, commenced a voluntary restructuring proceeding under Azeri law. Thereafter, IBA proposed a plan to restructure its Designated Financial Indebtedness, which amounted to approximately US$3.34 billion. Pursuant to the plan, the Designated Financial Indebtedness, which included claims governed by English law, would be discharged in its entirety in exchange for certain “entitlements.” The plan was approved by a substantial majority of the affected creditors and confirmed by the Azeri Court. Consequently, under Azeri law, the confirmed plan was binding on all affected creditors regardless of their vote on the plan or participation in the creditors’ meeting.

Following the Azeri court’s confirmation of the restructuring plan, IBA’s foreign representative sought and obtained an order from a U.S. bankruptcy court under Chapter 15 enforcing the plan and granting certain injunctive relief in the U.S. The foreign representative sought similar relief from the High Court of England and Wales. In particular, the foreign representative asked the High Court to permanently enjoin creditors from pursuing litigation related to the Designated Financial Indebtedness against IBA or its property except with leave of the court. Relying on the Gibbs rule, certain creditors holding Designated Financial Indebtedness governed by English law objected to the request. According to the creditors, their English law-governed debt could not be discharged by a foreign restructuring plan.

The High Court dismissed the foreign representative’s application for a stay finding that a permanent injunction would improperly prevent creditors that did not consent to the restructuring plan from exercising their rights under English law. According to the High Court, Great Britain’s incorporation of the UNCITRAL Model Law does not permit an English court “to vary or discharge substantive rights conferred under English law by the expedient of procedural relief which as a practical matter has the same effect, and has been fashioned with the intention, of conforming the rights of English creditors with the rights which they would have under the relevant foreign law.”

Appeal to the Court of Appeal

On appeal, the English Court of Appeal found that a court could only issue an injunction preventing creditors from enforcing their English rights if (1) the stay is necessary to protect the interests of the creditors, and (2) the stay is an appropriate way to achieve such protection. According to the Court of Appeal, the foreign representative did not satisfy either condition.

First, the stay was not necessary to protect creditors’ interests. According to the court, the restructuring plan had been implemented and come to an end, creditors had received their entitlements under the plan, and IBA was trading again. Therefore, there was no further need to protect creditors. The mere possibility that future lawsuits by English creditors could disrupt IBA’s ability to repay the new bonds issued as entitlements under the plan was not a sufficient concern to require the protection of an injunction.

Second, the stay was not an appropriate way to protect creditors. Instead, IBA could have implemented a scheme of arrangement under English law that mirrored the Azeri restructuring plan to ensure that creditors would be bound to the restructuring and be enjoined from taking actions that would hinder the plan.

The English Court of Appeal stressed that the scope of the UNCITRAL Model Law is limited to procedural aspects, and does not “attempt a substantive unification of insolvency law.” Therefore, while a stay is normally a procedural remedy of limited duration, the stay in this in this instance would achieve, in effect, a substantive remedy to bar English creditors from relying on their substantive rights. Accordingly, the court considered it would be wrong in principle to use the UNCITRAL Model Law to deprive the English creditors that had not voted for the plan of their rights against the debtor.

Takeaways

The decision of the Court of Appeal confirms that the Gibbs rule remains the law in England. Absent a parallel proceeding or sanction of a scheme in England, creditors with claims under English-law governed instruments may still pursue their claims in an English court notwithstanding a foreign insolvency or restructuring.

*Special thanks to Sophie Hewitt for assistance in preparing this post.

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About

The strength of our global bankruptcy, financial restructuring and insolvency practice lies in our multidisciplinary experience and international reach. Based throughout Europe, the United States, Canada, Latin America, Asia, Australia, Africa, the Middle East and Central Asia, our bankruptcy lawyers handle some of the most complex and sensitive domestic and cross-border assignments across the globe.